By Anne Sherry, J.D.
A Singapore-based company and its CEO are asking the U.S. Supreme Court to reject the SEC’s exercise of “tag” jurisdiction. According to the petition for certiorari, the Second Circuit’s acceptance of the practice, whereby a company is served via an officer who is temporarily visiting the United States, is unconstitutional and extends a split with two other circuits. The petitioners also argue that both the company and the officer were represented by counsel who was not authorized to accept service (Terraform Labs Pte, Ltd. v. SEC, October 6, 2022).
Investigation and service. The petitioners are Terraform Labs Pte, Ltd., and its CEO, Do Kwon. Terraform is a technology company based in Singapore; Kwon is a citizen and resident of South Korea. In May 2021, the SEC began investigating whether tokens that Terraform developed were unregistered securities. Both Terraform and Kwon retained counsel and voluntarily cooperated in the investigation by responding to document requests, and Kwon agreed to a five-hour interview with SEC staff. In September 2021, Kwon traveled to New York to speak at a blockchain conference, where the SEC had a process server serve Kwon with subpoenas. Later that day, the SEC emailed courtesy copies of the subpoenas to the petitioners’ counsel.
The petitioners argued both to the Southern District of New York and on appeal to the Second Circuit that the SEC violated its Rules of Practice when it served the subpoenas by handing copies to Kwon, Terraform's CEO, while he was present in New York. They also argued that the district court lacked personal jurisdiction because Kwon and Terraform had insufficient contacts with the United States. The Second Circuit ultimately agreed with the district court that the method of service complied with the SEC’s rules and that the parties had sufficient contacts with the U.S. for the federal courts to have personal jurisdiction over them.
Petition. The petitioners stress that there is no basis for jurisdiction over Terraform other than the theory of corporate tag jurisdiction. In Burnham v. Superior Court (U.S. 1990), the Court held that a court can exercise general jurisdiction over an individual defendant located its borders, “no matter how fleeting his visit.” But Burnham expressly declined to address whether tag jurisdiction applied to corporations. The First and now the Second Circuit have extended the concept to corporations, and Justices Gorsuch and Sotomayor have questioned why it should apply to individuals but not corporate entities. But the Fifth and Ninth Circuits rejected corporate tag jurisdiction on constitutional grounds. The petitioners believe that the circuit split and importance of the question make certiorari appropriate, and they unsurprisingly argue against the legality of corporate tag jurisdiction.
According to the petitioners, the Second Circuit violated the rules of statutory interpretation to conclude, based on a decades-old case that interpreted Federal Rules of Civil Procedure—not the SEC Rules of Practice—that service on Kwon amounted to service on Terraform. The SEC rules at issue pertain to orders instituting proceedings, while leaving a gap regarding administrative subpoenas. “Courts should not write in a provision covering a situation that the SEC could address by notice-and-comment rulemaking,” the petitioner asserts.
In the petitioners’ view, the Court allowed individual tag jurisdiction in Burnham because of the long history and tradition that an individual’s physical presence confers personal jurisdiction. That history and tradition does not exist for corporations. The Second Circuit’s failure to engage in a minimum contacts analysis ignored Perkins v. Benguet Consolidated Mining Co. (U.S. 1952), where jurisdiction over a corporation was rooted in the company’s contacts with the state, not the in-state service of the company’s president.
The SEC also ignored its own rules through its method of service, according to the petition. Rule of Practice 150 dictates the methods of service permitted when “service is required to be made upon a person represented by counsel who has filed of a notice of appearance.” The courts below incorrectly ruled this inapplicable because the petitioners’ counsel did not file a notice of appearance, even though the firm appeared before the SEC to represent the petitioners, and the SEC communicated about the investigation via the law firm. Under the plain language of the Rules of Practice, attorneys are not required to accept service of subpoenas or other compulsory process on behalf of their clients. The Second Circuit’s interpretation of the rules “would convert an appearance through counsel into a de facto acceptance of service in contravention of” the law and rules, the petitioners assert. On the contrary, it is well established that an attorney can only accept process if the client expressly authorizes such service.
The case is No. 22-332.